Generalists and Specialists in the Credit Market
63 Pages Posted: 21 Mar 2016 Last revised: 1 Sep 2016
Date Written: March 21, 2016
In this paper, we propose a method to analyze the structure of the credit market. Using historical data from Japan, we explore banks’ lending patterns to the real economy. We find that generalist banks (with diversified lending) and specialist banks (with focused lending) coexist, and tend to stick to their strategies over time. Similarly, we also document the coexistence of generalist and specialist industries (based on their borrowing patterns). The observed interaction patterns in the credit market indicate a strong overlap in banks’ loan portfolios, mainly due to specialist banks focusing their investments on the very same generalist industries. A stylized model matches these patterns and allows us to identify economically meaningful sets of generalist banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable to shocks compared to specialists. In fact, we show that high leverage levels can undo the benefits of diversification. Hence, banks’ position in the credit network can be informative about their riskiness from a systemic perspective.
Keywords: networks, bank lending, portfolio theory, fire sales, contagion, diversification, systemic risk
JEL Classification: G11, G20, G21, G28, G32
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